Some racing horse breeders keep a few of their foals and sell the others. Generally, they put the poorest quality foals up for sale early in the season. Buyers have limited information about the foals up for sale, but they know that the first foals from some breeders will not be good racers. Other breeders sell all their foals. Since buyers cannot know which breeders are keeping back their good foals, they are suspicious of all foals offered for sale early in the season, lowering the sale prices. Breeders who sell all their foals are therefore forced to hold back their better foals until later in the season, to get true market prices for them. The market for foals is therefore subject to the

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The adverse selection problem arises because buyers have limited information about the quality of foals being sold early in the season, leading them to be suspicious and lower their offers for all early-season foals, regardless of their actual quality. This scenario is a classic example of adverse selection, where the lack of information leads to a market inefficiency.

Some Racing Horse Breeders Keep a Few of Their Foals